PTT

PTT Plc 

 

Investment thesis

 

Despite a more than 50% rise in the stock price YTD, we believe that the price has further to run. A greater dynamic gas cost adjustment is to be more realizable from April and an anticipated solid profit profile for PTT will likely prevail into 2Q16. These positive elements will be backed by rising output and a heavier decline in gas costs—which would therefore prompt flow of the consensus’ FY16 earnings upgrade during the course of 2016. Valuation-wise, the current assessment is still inexpensive with a YE16 P/BV of 1.2x (1SD below its historical average)—while the forecast dividend uplift, translating to a 4% yield for 2016, is another key supportive factor in the backdrop to its share price.   

More responsive gas cost to buoy 1Q16 operation …

Apart from the anticipated solid performance of its E&P and refining & petchem subsidiaries, we are also more upbeat than before on PTT’s core operations for 1Q16. As such, we anticipate NPAT to flip back to the normal level of Bt24.6bn versus 4Q15’s slim profit of Bt188m (also up 9.2% YoY). While many shutdowns of GSPs and PTTGC subsidiary’s units will dent gas throughputs and GSP outputs, core gas business’ performance would have improved—gas margin will rise QoQ on lower gas costs—which will reduce losses on sales to industrial clients (~14% of total gas sales) and NGV sales. PTT guided losses on NGV dropped to a record low of Bt1.3bn in 1Q16, from 4Q15’s Bt2.3bn. Likewise, pevailing low oil price would further strengthen performance of retail oil business, both volume and retail margin (summary of our 1Q16 forecasts, Figures 1 and 2).   

… and to gain a stronger pace in 2Q16 … 

Inflated costs plus sliding gas selling prices & output would bode ill for PTTEP’s 2Q16 profitability—while sliding refining margins will hit its refining-based units hard. Those negative factors would deteriorate PTT’s NPAT for 2Q16. We remain optimistic on the outlook for its core gas business. Thailand’s hotter-than-usual weather will likely intensify demand for gas and also PTT’s gas sales—which we anticipate will be at least on par with 2Q15’s (~4,900mmcfd, up 5% QoQ). Also, fewer shutdowns of GSPs will boost output. Based on the planned shutdowns, we simulated the output to rise 4% QoQ to ~1.6mt. Moreover, lower gas costs will further trim NGV losses; and also prompt scope for gas margin sold to industrial customers—the adjustment in its gas costs typically slows in response to a change in market selling prices, which fell sharply in tandem with oil prices.     

… gas game to return to norm; our above-consensus estimate holds 

While PTTEP’s profit profile and refining margins seem to have peaked in 1Q16, we stand by our FY16 NPAT estimate of Bt87bn (which is currently 11% higher than the street’s projection). Our above-consensus estimate is largely backed by a more dynamic gas cost decline. That said, we believe that gas EBITDA will likely return to its norm of Bt55-60bn a year versus the Bt45bn posted for the 2015. The gas price has so far slipped 22% YTD versus the mere 10% YoY decline seen last year. Price depreciation will likely prevail even if the current strength in oil price tracks sideways through the rest of 2016—we then anticipate that price will have troughed by 4Q16. As such, we believe that its more cost-down dynamic feature will likely incite the street to revise up estimates consistent with our lead.